Walking Back Bernanke Wished on Too Much Information
Hedge funds and other speculators dumped more than $14 billion of bullish dollar bets before the Federal Reserve signaled it would pare stimulus, leaving them on the wrong side of a central bank trying to improve transparency.
Futures traders reduced wagers that the dollar would rally against the pound, yen and six other currencies by the most since 2006 in the week ending June 18, according to Commodity Futures Trading Commission data compiled by Nomura Holdings Inc. Fed Chairman Ben S. Bernanke’s comments on quantitative easing at a press conference the following day spurred the Dollar Index to its biggest gains in almost a year.
Macro hedge funds to algorithmic traders misjudged slower inflation and rising bond yields as a sign the Fed would maintain into 2014 the cash it’s pumping into the economy, which tends to debase the currency.
“The market talked itself into expecting a more dovish press conference than it got, and that’s increased the scale of the selloff in risk assets and dollar buying since,” Kit Juckes, a strategist at Societe Generale SA in London, said in a phone interview yesterday. Investors pared dollar bets “into the teeth” of a Fed meeting, said Juckes, adding that he’s still bullish on the dollar “long term.”
Bernanke committed himself to greater openness when he took the reins of the Fed in 2006, instituting press conferences and publishing forecasts to give markets more clarity.
The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six U.S. trading partners, rose 2 percent last week, its biggest gain since July, before falling for the first time in five days to 82.521 as of 8:46 a.m. in New York. The gauge will end the year at 85.2, according to the median forecast of 13 strategists surveyed by Bloomberg News.
Bernanke said June 19 after the Fed’s policy meeting that the central bank may start dialing back its unprecedented bond-buying program this year and end it entirely in mid-2014 if the economy achieves sustainable growth. The Fed has been buying $40 billion of mortgage bonds and $45 billion of Treasuries to inject cash into the economy.
Markets from currencies to equities to bonds to commodities have gyrated since the Fed meeting.
The Standard & Poor’s 500 Index of stocks fell 4.8 percent from June 18 through yesterday. Yields on 10-year Treasuries, the benchmark for everything from home mortgages to corporate borrowing, touched 2.66 percent yesterday, the highest level since August 2011, and were at 2.50 percent today. Gold slumped below $1,300 an ounce last week for the first time since September 2010, data compiled by Bloomberg show.
“Will the Fed try to walk back from how the market has perceived its comments?” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said yesterday in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Mike McKee. Pimco, based in Newport Beach, California, manages the world’s biggest bond fund.
“The central-bank brand, this notion that the markets had that they were wise, they were powerful and were effective is under assault,” El-Erian said. “The Fed has to be very careful what it does with its reputation here.”
Two Fed presidents said yesterday that U.S. monetary policy remains accommodative, less than a week after Bernanke’s comments jolted financial markets.
Richard Fisher, president of the Fed Bank of Dallas, said in London that “the word ‘exit’ is not appropriate” for what the U.S. central bank is doing, while Minneapolis Fed President Narayana Kocherlakota said officials must emphasize that policy will remain accommodative “for a considerable time” after the end of QE.
The JPMorgan Global FX Volatility Index, which measures price swings in currencies, touched a more than one-year high of 11.96 percent yesterday, before falling back to 11.68 percent.
The dollar surged 3.8 percent against the yen last week, its biggest gain since December 2009.
That was after futures traders decreased bets that the Japanese currency would weaken versus the greenback -- known as net shorts -- to the least since February for the week ended June 18, CFTC data show. At the end of May, short positions had been as high as 99,769, the most since July 2007.
Investors “got hurt in dollar-yen,” Peter Gorra, the chief dealer in New York at BNP Paribas SA, said in a phone interview yesterday. “The markets want the Fed to be dovish forever, and the Fed can’t have that. They can’t have the markets telling them what to do,” he said.
Investors cut long positions in the dollar, or wagers that the U.S. currency will appreciate, by $14.3 billion in the run-up to Bernanke’s comments, according to Nomura’s analysis of CFTC data. The bets now stand at $14.8 billion, down from as high as $41.7 billion last month, the data show.
“Flows seem to be dominated more by the hedge-fund space and the CTA space,” Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said yesterday in a phone interview, referring to commodity trading advisers, or fund managers that have to register with the CFTC. “There are signs of real money coming in a little bit as well, but they’ve been largely on the sidelines,” he said, referring to larger investors such as pension funds.
CTAs are mostly systematic traders of foreign exchange, equities and bonds, as well as raw materials. The Newedge CTA Index, which tracks some of the largest systematic funds, lost 1.7 percent in May, the biggest drop since October and following five straight months of gains.
“The market moves are pretty substantial,” Jens Nordvig, the New York-based global head of foreign-exchange strategy at Nomura, wrote yesterday in an e-mail. Hedge funds’ “position reduction has been prevalent in this space, although it has been a very broad-based phenomenon, involving active real money too,” he wrote.
Falling stocks and rising borrowing costs could still “derail the recovery” and prompt the central bank to ease monetary policy, according to Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004 to 2008.
“The recovery is still pretty fragile and hopefully this will have no great impact,” Wright said in a phone interview yesterday. “There isn’t really the option of gradually tightening monetary policy while being transparent about it.”
Fed officials have said that greater public understanding renders their actions more potent because the economy is affected by expectations about future policy.
The central bank introduced a 2 percent inflation goal and started holding press conferences after every other meeting of the Federal Open Market Committee. It also began publishing policy makers’ forecasts for economic growth, unemployment, inflation and the future path of interest rates.
The Fed last week raised its U.S. growth forecasts for next year to 3 percent to 3.5 percent and reduced the outlook for unemployment to as low as 6.5 percent. Asset purchases may continue in 2014 until unemployment declines to about 7 percent, Bernanke said.
Investors may be questioning whether the central bank is considering factors outside of its mandates of employment and price stability, said Wright at Johns Hopkins.
Unemployment, which stands at 7.6 percent, hasn’t been less than 7 percent since November 2008. A gauge of consumer prices excluding food and energy that’s watched by the Fed rose 1.1 percent in the year through April, matching the smallest gain since records started in 1960.
“The Fed has made reasonably clear that it’s unhappy about asset purchases, but they haven’t communicated directly exactly why,” Wright said. “Is this because of fear of bubbles? Is this because of the politics of a big balance sheet? It’s because of some factor X. We don’t know what that factor X is, and I think that’s causing the market to price in an unreasonable pace of monetary-policy tightening.”
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